Virginians who lost their homes through short sales or foreclosures were previously allowed to exclude up to $2 million in forgiven mortgage debt before 2018. However, the provision that allowed people to exclude forgiven mortgage debt ended in 2017. This means that people who have had mortgage debt forgiven may face thousands of dollars in taxes.
One possible solution for people who have forgiven mortgage debt that they will be taxed on is to file for bankruptcy protection. Under the tax code, people who are able to prove to the IRS that they are insolvent are allowed to exclude forgiven debt from their income tax returns. Being insolvent means that someone’s debts exceed the value of their assets.
People who have had mortgage debt forgiven will want to weigh the benefits of filing for bankruptcy versus the negatives. They might enjoy tax savings while losing certain assets that are not exempt. If they decide to file for bankruptcy to save money on their taxes, they will want to file their bankruptcy petitions before they file their tax returns. Once the tax is assessed, it will have to be paid. IRS tax debt is a type of debt that cannot be discharged in bankruptcy in most cases.
Filing for personal bankruptcy protection is not a simple decision for most people. People who have had mortgage debt forgiven during this year might want to consult with an experienced bankruptcy lawyer to learn about their options. A bankruptcy attorney might help his or her clients to understand the tax liability that they might face for their forgiven mortgage debt so that they can make an informed decision about whether bankruptcy might be a good option. People who opt for bankruptcy may avoid being taxed on their forgiven mortgage debt and receive a fresh start.